Eurozone inflation holds steady at 0.2%

The eurozone’s inflation rate held steady in August, highlighting the challenge facing the ECB as it seeks to revive consumer-price growth.

Consumer prices rose an annual 0.2%, exceeding the median economist forecast for a reading of 0.1%.

Core inflation held at 1%, the EU’s statistics office said in a report yesterday.

The ECB has cut interest rates and is buying bonds to battle anaemic inflation, which has been below the central bank’s goal of just under 2% for two years.

With China’s economy cooling and oil prices falling, ECB executive board member Peter Praet said last week the challenge has become tougher and that policymakers are ready to do more if needed.

The data provide “a modicum of relief for the ECB”, said Howard Archer, an economist at IHS Global Insight.

“It still seems most probable that the eurozone will avoid renewed deflation and that consumer price inflation will trend gradually up from the final months of 2015.”

The euro rose 0.2% to $1.1213 early yesterday afternoon in Frankfurt. The single currency has climbed 2% in August, and is set for its best month since April.

To help reverse course and fulfil its mandate, the ECB is in the midst of a quantitative easing (QE) programme that it plans to run until September 2016.

The ECB’s governing council holds its next policy meeting on Thursday in Frankfurt, where president Mario Draghi will give a press conference after the decision and unveil new growth and inflation projections.

The ECB currently forecasts that inflation will average 0.3% this year, improving to 1.5% in 2016.

Consumer prices are “driven by energy and that for the ECB is a double-edged sword”, said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen.

“It’s good for real income, and we see the recovery in the euro area is driven by private consumption. The bad part is that it drives inflation further away from the objective.”

A Bloomberg gauge that tracks returns from 22 raw materials plunged to the lowest level since 1999 last week on concern a glut in everything from oil to copper will be exacerbated as the Chinese economy grows at the slowest pace in more than two decades.

If those factors threaten its inflation goal, the ECB is ready to expand or extend QE, Praet said last week.

“Developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path toward 2%,” he said.


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